A client/friend was looking for a way to reward four key people at his plumbing and heating company. He decided to offer them ownership and worked out stock shares for each person. He figured this could save him cash in the short run, and reward them all in the long run.
It’s a lovely idea conceptually. In actuality, it can get a little messy. And, it did.
One of the four shareholders embezzled about $10,000. Another of the shareholders needed to be fired – he didn’t come to work on time and rarely fulfilled his job duties.
My friend didn’t know how to fire him without reworking the ownership structure, so the unproductive fellow just stayed on – for a couple of years. The other two were family members with very different ideas about how the company should be run. And ever since they were awarded stock, they had been lording their positions over other team members, with confusing results.
Fortunately, my friend maintained majority ownership of the company. He finally sat down with his family, and his lawyer, and crafted buyouts for the nonfamily members. It was a heartbreaking experience, and the relationships haven’t fully recovered. When I asked my friend, “What did you learn from your experience?”
He said, “I wanted my team to know how much I appreciated them. However, next time, I will plan it out.”
What to do and not do
Interested in sharing the wealth and the stock? Here’s the best of what I’ve learned about partnerships.
Before you jump in …
• Put a business plan together. Answer the big questions: What, why, for whom, how much, and by when.
• Create an organizational chart. Be intentional and clear about team assignments, and be flexible as needed.
If it makes sense to create a partnership …
• Don’t create 50/50 or other equal percentage ownership arrangements. There is room for one at the top of any organization. Someone has to ultimately set the point on the horizon and steer the ship.
• Clarify the investment from each partner. Determine if the money put in is an investment, a loan or sweat equity. Clarify how and when and in what order partners will be paid back.
• Don’t offer stock as a replacement for paying people what they should be earning now. It’s a risky proposition to defer income that people believe they currently are owed.
• Craft a legally binding operating agreement. You may want to encourage each partner to create a limited liability company and to partner up the corporations. Each of you is well served to have his own lawyer.
You might profit share instead …
• Instead of ownership, profit sharing may be a good way to reward key employees. Consider sharing a percentage of profits above a minimum established level of profit. Start with your budget, and work together to come up with a compelling game with your team members.
Get a handle on the money …
• If you are going to offer ownership, or profit sharing, keep meticulous score and share the data.
Want to learn more?
A great resource is “A Stake in the Outcome,” by Jack Stack. Stack has created over 30 employee-owned companies of all shapes and construct. He is generous with his best advice and real-life stories.
Ellen Rohr is an author and business consultant offering profit-building tips, trending business blogs and online workshops at EllenRohr.com. Her books include “Where Did the Money Go?” and “The Bare Bones Weekend Biz Plan.” She can be reached at ellen@ellenrohr.com.
